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Byline: Anuj Gangahar

Hans Eichel, the German minister of finance, is calling for a sweeping overhaul of Germany's approach to the regulation of hedge funds - as regulators elsewhere across the globe examine their attitudes to the sector.In the first of a series of initiatives to be rolled out over the coming months, Eichel plans to overhaul the country's investment fund and tax laws that discourage many German investors from buying financial services from abroad.

A spokesman for the German ministry of finance said in a statement: "We want to strengthen the competitiveness of Germany as a financial centre, thereby making a contribution to growth and employment."

Analysts say Eichel plans to attract hedge fund managers to Germany using a relaxed regulatory regime. This represents a considerable change of stance for Eichel, who was a strong backer of moves for tighter regulation of the hedge fund market in the wake of the near-collapse of LTCM in late 1998.

The exposure of German institutions to hedge funds has been, and is still, low compared with many other developed economies such as Japan, US and the UK.

The German government intends to limit the liability of smaller investors by making it impossible for them to invest in single manager hedge funds. But smaller investors will be allowed to invest in funds of hedge funds.

Funds of hedge funds are designed to limit the risk taken on by investors by diversifying their exposure across a range of styles and fund managers.

Germany has tabled a draft law which makes provision for unlimited short selling although the government may require a notification period. Hedge funds have long been the centre of controversy with regard to short selling, with many claiming that their activities contribute to market volatility.

But there is no empirical evidence to support this argument and most agree short selling is a vital activity, providing important market liquidity.

London has established itself as the European centre for hedge fund investing and many of the most-established US firms have set up London offices over the past few years. One analyst says that any attempt by Germany to compete with London should be welcomed: "London, after New York, is clearly the second-best place in the world from which to conduct hedge fund business. But I do think hedge funds should be more visible in an economy of the size of Germany than they are. …